Are We Back in a Tech Bubble?

Are we back into another tech bubble like the one from 1997-2000? Some tech companies are selling at ridiculous P/E ratios, which is a lot worse when we look at those that are not listed yet. Some of them have not even turned a profit yet are already worth billions, which I think is something that we should, at the very least, be concerned about.

(Image source: pixabay.com)

I don't think Singapore has any of these tech companies that I'm describing, but it does seem very prevalent in Silicon Valley. Taking a prime example, Snapchat is valued at over $10 billion, yet in 2014 it has lost $128 million on $3 million generated (but just to add a note to this, it only started to generate revenue in October of that year) For a more detailed write up on the 2014 financial statements of Snapchat you can look here. This seems to be quite a ridiculous valuation unless you expect Snapchat to grow to earn at least $500 million a year for a P/E ratio of 20. While it may be possible, but it seems like a moonshot and that number is just to make the investment seem like a decent preposition, add on risk premiums and time value of money to this valuation makes it even worse.

If we look at listed companies, Facebook has a P/E ratio of over a 100, which while better is still quite high. Facebook has a higher probability in my opinion to become a decent investment than Snapchat, it has increased its revenue per US user as well as its number of users that led to growth in the 3rd quarter, but it has to continue to maintain its profitability and grow its earnings by a multiple of 5 to reach a P/E ratio of 20, which I consider to be a reasonable P/E ratio. Whether this can happen is anyone's guess.

Some people may say that the sky's the limit for these companies and that they can grow their revenue and profits to new highs, but that's what people said during the dot-com bubble as well, so we really should look out for this bubble. One more thing is that the equity of these companies are usually only a fraction of their valuation/ market cap so if things don't work out as planned, there is a very small safety net.

I'm also not saying that all tech companies are like this, some such as Alphabet and Apple, sell at valuations of around 35 and 13 respectively, which are quite good considering that they have some growth prospects (I also like Google's idea of taking on moonshot projects on the side such as self-driving cars, but sadly I don't invest in overseas markets yet). There are still a few gems worth considering in the tech industry, but we should also approach them with caution.

Anyway, as mentioned at the start, I don't think Singapore has these overvalued tech companies (or at least as far as I've heard), so how does it affect us, especially considering that companies such as Snapchat are not publicly listed and the ones losing the money are venture capitalists? I think that it will have a ripple effect as some listed companies also have venture capitalist arms and this may set off a domino effect, so we should watch this bubble with some caution as well. However, an increase in interest rates may help to diffuse these bubbles though as investors require a higher rate of return that reduce the intrinsic value of these companies, leading to lower valuations.

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